Saturday, March 24, 2012

>RAMA PHOSPHATES: Promoter to dilute stake through strategic investor

■ Good times for SSP manufacturers: Single super phosphate (SSP) manufacturers will benefit the most from the rising selling price of most complex fertilisers especially diammonium phosphate (DAP). After the implementation of the Nutrient-based pricing scheme (NBS) for complex fertilisers, the prices of the complex fertilisers have shot up sharply in the past couple of years due to a rising input cost. In case of DAP, the prices of the key raw materials like rock phosphate and phosphoric acid have firmed up sharply. Thus, farmers have shifted to low-grade phosphatic fertilisers like SSP, which has only 16% phosphate content as compared to 46% in case of DAP. The sales offtake of SSP has grown by 25% in the last one year and leading SSP producers like Rama Phosphate have grown exponentially on the back of the change in the business dynamics for the SSP producers.

■ Timely capacity addition to help sustain growth momentum: Rama Phosphates is the third largest player in the SSP manufacturing space with a total installed capacity of 4.78 lakh tonne. It has undertaken capacity expansion at its existing manufacturing locations of Indore and Udaipur, and would add around 3 lakh tonne of additional capacity in the next two years (1.5 lakh tonne each in FY2013 and FY2014) to around 6.8 lakh tonne. The capacity addition would help cater to the needs of the key growing markets for SSP, ie Madhya Pradesh, Rajasthan, Gujarat and Maharashtra. Moreover, the company is also looking at expanding its footprint into the well irrigated regions of Haryana and Punjab through expansion at its Udaipur plant. SSP is extensively used by farmers for cultivating sugar-cane and oilseeds.

 Subsidy cut could affect margins in FY2013: As per a Government of India notification the subsidy for phosphorus under NBS has been decreased by 32.6% to Rs21.8 per kg which will decrease the government subsidy portion on SSP by Rs1,685 per tonne. A large part of it— Rs1,000-1,250 per tonne—is likely to be passed to consumers through an increase in the selling prices. The easing of the raw material cost should also cushion some of the adverse impact of the reduction in the subsidy. However, we believe that the demand for SSP would remain firm and the SSP producers should benefit from economies of scale.

■ Promoter to dilute stake through strategic investor: The current holding of the company’s promoter stands at 81% but as per the Securities and Exchange Board of India guidelines a promoter has to bring down his holding to 75% by June 2013. The promoter is looking for a strategic investor in order to dilute his stake in the company. After the introduction of NBS for SSP in FY2011 and a gradual increase in the demand for SSP as compared with the other fertilisers, the company’s management is looking at divesting the promoter’s stake at a premium to the current price. This, we believe, is positive for the stock.

■ Valuation and outlook: Rama Phosphates, one of the three large SSP manufacturers, is benefiting from the revival in demand from SSP in India. The timely expansion of its manufacturing capacities would enable the company to tap the opportunity and grow its sales volume by around 25% over the next two years. In terms of valuations, the stock trades at around 2x FY2014 rough estimates and below its book value (on full depreciated assets). This makes it one of the cheapest stocks in the fertiliser space. Moreover, the potential reduction of the promoter’s stake at a premium to the current valuation is another trigger for the stock. We are extremely positive on the stock and see scope for substantial appreciation. However, given the extremely low market cap and float at the counter, we are not initiating active coverage on the stock.

Company background
Rama Phosphates is one of the leading fertiliser manufacturing companies in India. It is a public limited company with stocks listed on stock exchanges. Rama Phosphates has been in existence for the last 25 years. One of its units at Pune has been operating for the last 40 years. Rama Phosphates is one of the largest manufacturers of SSP in India. Its products are marketed in various states of the country under the brands of "Girnar" and "Suryaphool". Both are leading brands in the states of Maharashtra, Madhya Pradesh, Chhattisgarh, Rajasthan, Karnataka, Haryana and Gujarat. The total installed capacity of the company is 4.78 lakh metric tonne (MT) of SSP and 1.83 lakh MT of sulphuric acid. 

RPL has two business segments
1) Fertilisers 2) Edible oils

The company is engaged in manufacturing phosphatic fertilisers, viz SSP (powder as well as granules), mixed fertilisers, namely NPK, and chemicals like sulphuric acid and oleum.

Business segments

SSP division
Rama Phosphates has three manufacturing units for SSP located in Rajasthan, Maharashtra and Madhya Pradesh. The company has state-of-the-art manufacturing facilities for the production of SSP in both granule and powder forms, and sulphuric acid, which is used mainly for captive consumption.

Indore unit: The company's Indore plant has installed capacities of 165,000MT of SSP and 102,000MT of sulphuric acid. The company has a state-of-the-art solvent extraction plant which includes seed crushing, packing and distribution facilities as well as in-house captive power generation. Power is generated captively by exo-thermic heat produced in the process of manufacturing sulphuric acid. The company's sulphuric acid plant has been set up with DCDA technology and is one of the pioneers of sulphuric acid plant in Madhya Pradesh with a total capacity of 265 tonne per day including Battery Grade Acid.

Pune plant: The company's Pune plant is one of the oldest SSP plants in India having been in existence for over 40 years. It is popularly known as "Rama Krishi Rasayan". The plant is situated on the outskirts of Pune in Maharashtra and is fully integrated with all requisite facilities such as railway siding, sulphuric acid plant, oleum plant, SSP plant, granulation plant and mixed fertiliser plant. The total capacity of the plant is 132,000MT of SSP, 350TPD of GSSP, 150TPD of mixed fertilisers and 81,600MT each of sulphuric acid and oleum.

Udaipur plant: This unit is situated in Jhamar Kothra, which is on the head of rock phosphate mines. Thus the availability of the basic raw material, ie rock phosphate, has made this unit the most strategic unit of the company. The entire unit is fully integrated with in-house facilities, such as rock grinding, finished goods storage including granule storage and stand-by DG power sets. The company's installed capacity is 181,000MT of SSP. Rama Phosphates has also set up a new GSSP plant with an installed capacity of 500 tonne per day. It is one of its kind and has the largest capacity in India. The company had incurred a capital expenditure of Rs10 crore to set up this plant.

Oil division
Indore plant: The company's oil division is situated next to its fertiliser division within the same premises and has seed crushing capacity of 165,000MT at an average of 600 tonne per day. The company's plant is fully integrated with all requisite facilities for storage of seeds in silos, crushers, expanders, DT, flakers, storage godowns for deoiled cakes and tanks for storing crude oil. Parallel to the crushing plant, the company also has its own refinery plant with Alfa Laval technology for refining crude soy oil of 33,000MT at 100 tonne per day. The company's brand "Sufla" is one of the most popular brands in Madhya Pradesh and other northern parts of India.

Industry overview
The SSP fertiliser industry is the pioneering fertiliser industry in India and the first SSP plant was established by EID Parry in 1906. Today in India there are 80 SSP manufacturing plants with a total installed capacity of 79 lakh tonne. The capacity utilisation in the SSP industry was near about 25 to 30% before FY2011 due to an unfavourable working environment for the SSP manufacturers.

Manufacturing process
SSP is produced by digesting grounded rock phosphate with diluted sulphuric acid. SSP contains 16% of phosphorous (K) and 16% of sulphur (S). This is the only fertiliser that provides phosphorous and sulphur along with calcium. SSP improves root growth and chlorophyll synthesis which, in turn, improve the product quality and immunity of plants.